Six Think Tanks Tackle the Budget Deficit

Today, at the request of the Peterson Foundation, an ideologically diverse group of six think tanks proposed their long-term solutions to the federal deficit problem. Not surprisingly, they disagreed on most details. But the project reflected surprising consensus (though hardly unanimity) on a some big issues. Most important, four of the six aimed to hold federal spending two decades from now at around 23 percent or 24 percent of Gross Domestic Product. Similarly, four projected federal tax revenues at roughly the same level. This suggests a significant increase in taxes over today (and over the House-passed budget) and a big drop in deficits.

The groups represented views from the political right (the Heritage Foundation and the American Enterprise Institute), the left, (the Economic Policy Institute and the Center for American Progress), and the middle (the Bipartisan Policy Center). The sixth group, the Roosevelt Institute Campus Network, was chosen to represent the views of young people. The Tax Policy Center served as a “scorekeeper” for the tax proposals, but the plans themselves are the work of the individual think tanks and not TPC.

Reviewing these plans is a glass half-empty/ glass half-full exercise, and it would be easy to focus on areas of disagreement—of which there are many. But I really was struck by the broad consensus in some key areas. For instance, the spending targets for AEI, BPC, and CAP all clustered at around 23 percent of GDP. Roosevelt was a bit higher at about 25 percent. The outliers were Heritage at 18 percent (very close to the House budget) and EPI at 28 percent. The consensus reflects the view of most mainstream economists and budget analysts that spending on programs such as health care will inevitably rise as the population ages and use of medical technology grows.

Interestingly, the groups disagreed in some important ways on how they’d spend money in 2035. Federal health costs, which the Congressional Budget Office projects will reach about 10 percent of GDP in 2035, would also hit that level under the BPC and EPI plans. AEI, CAP and Roosevelt figure they could drive that down to 7 or 8 percent and Heritage thinks it can cut it to 6 percent. Heritage, BPC, and AEI all favor shifting Medicare to a premium support/voucher system. EPI and Roosevelt would expand the payment reforms in the 2010 health law.

Those spending estimates very likely drove revenue targets for most of the groups to roughly the same 23-24 percent levels. BPC, CAP, EPI, and Roosevelt all clustered in that range, while Heritage aimed for about 18.5 percent and AEI about 20 percent.

How did they get there? They all would reduce or eliminate many tax expenditures, although most would preserve subsidies for charitable giving and mortgage interest in one form or another. After that, it was a free-for-all. AEI backed a progressive consumption tax, Heritage favored a “modified’ flat tax. The other groups would maintain the existing income tax system framework with a variety of changes.

Four of the groups--AEI, CAP, EPI, and Roosevelt-- backed a carbon tax. Most of the plans would increase or even eliminate the cap on earnings subject to Social Security payroll taxes. However, Heritage would go in the opposite direction and repeal the payroll tax entirely and fund the (much smaller) Social Security system through the flat tax.

Take a look for yourself at these plans. They reflect a wide variety of ideological views. But all of them would reduce deficits and debt levels below where they would be without action. And that, at least, is something to build upon.

7Comments

Michael Bindner :: 3:27 pm on May 25th, 2011:

I suspect that the plans added up because TPC was scoring them.

It is too bad that no one advocated base broadening Medicare revenues AND raising tax rates. This comes from inviting mostly established players. New answers will not come from current actors. After yesterdays NY-26 result, the current Republican ideas are essentially dead. If anyone mentions premium support in the future (including TPC), they will lose their place at the table – and the GOP may quickly go the way of the Whigs. If Chairman Ryan is even on the Budget Committee in the next Congress, I will be very surprised.

Consolidating all health care and non-retirement entitlement spending (as well as other human services) into a single tax on employers would provide an incentive to employers to find lower cost/higher quality alternatives.

It is also disappointing that the progressive movement is slow to pick up the fact that the only way to make higher taxes more palatable to the wealthy is to threaten them with more worker – particularly union – control of industry through repeal of restrictions on concentrated ownership in the Taft Hartley Act and by proposing Personal Retirement Accounts in Social Security which old employer voting stock rather than index fund. One whiff of such a proposal and capitalists will fall all over themselves to go back to the old bargain, which Reagan voided.

Cutting tax benefits is all the rage, however in order to reverse the aging crisis, the answer is not better finance but more children. Shifting funds from housing subsidies to the rich to income support to families – to the tune of $500 per month per child – would make this happen without the housing industry taking a hit.

The tax benefit cut that should be considered is treating disbursements from selling inherited assets, capital gains and dividends as normal income.

Finally, to be realistic, use the Clinton era rates as the baseline for tax reform. This keeps all players honest, since without compromise, these rates become law automatically. Of course, if compromise is simply avoided, there is no need for any deal.

The real reason for all this activity is that the current players believe going back to the Clinton era is politically toxic. They are most likely wrong about that – however the people who FUND all of these organizations, including TPC, would rather not see these rates again. I have no qualms about stating this, since no one funds me.

Sid F :: 4:37 pm on May 25th, 2011:

“Take a look for yourself at these plans”

Gosh I have read only one, and not sure I would give that suggestion to even people I heartily dislike.

This is another exercise in futility, serving only to employ the participants and give the impression that something is being done about a deficit that no one will do anything about.

I would call them “useful idiots” but this person already beat me to that designation.

Quoting from the Peterson report:The fundamental difficulty with respect to health care is that none of us really knows what specific reforms are needed to restrain cost growth, and how much those reforms might save, while also maintaining high quality health services and outcomes.

The Soviets’ brightest minds never could figure out how to make a command and control economy work, either. The government-run stores were almost always out of price-controlled products, and the products were of grossly inferior quality. Yet any proposal to abolish the government-run stores was characterized as an attack on the poor.

All six organizations’ plans put the federal debt on a sustainable trajectory through 2035.

Record-breaking tax increases buy us a reprieve of 12 years, after which we will face the same problem with much less ability to increase taxes to close the gap. Brilliant.

Until health care for the non-poor is put on a sustainable track, meaning something much more market-oriented than third-party payment for non-emergency care, the spending problem will not be solved and we will be throwing good money after bad. The unfortunate truth is that government-funded health care for the middle class is not fiscally sustainable and cannot be made sustainable. Efforts to do so will waste huge amounts of money and produce nothing but a sham, with the middle class fleeing to private care the same way they flee urban public schools.

SteveinCH :: 5:19 pm on May 25th, 2011:

Seriously Michael?

I’ll make you a wager of any amount you desire that we will not have the Clinton tax rates across the income distribution on 1/1/2013. Care to take me up on that?

Or perhaps your comment about using this as the baseline is simply wishful thinking.

Michael Bindner :: 1:26 am on May 26th, 2011:

Do you really think that the Tea Party will compromise with Obama on taxes? If not, the 2000 tax rates come back automatically. Unless Obama geeks, and he might, he has the stronger hand. This time, Larry Summers is not advising him, so it is more likely he will play hard ball.

Steveinch :: 7:34 am on May 26th, 2011:

So I take it that yout answer is no bet Michael?

Michael Bindner :: 11:45 am on May 26th, 2011:

I don’t bet on games that others control. I once bet a bar owner dinner that on a given day, his place would be empty. I paid up at the Cheesecake Factory and the bill was over $100, since we both prided ourselves on having every course, from appetizers through cake.